Bartho Caponi, MD

METHODS

RESULTS

DISCUSSION

METHODS

RESULTS

DISCUSSION

METHODS

RESULTS

DISCUSSION

The problems surrounding hospital observation care and associated audits by Recovery Audit Contractors are gaining increased attention from both Congress and the Centers for Medicare & Medicaid Services (CMS).[1, 2, 3, 4, 5] On August 6, 2015, President Obama signed the NOTICE (Notice of Observation Treatment and Implication for Care Eligibility) Act (P.L. 114‐42),[4] which will require all Medicare beneficiaries receiving observation services for over 24 hours to be informed of their outpatient status. However, providers and hospitals are currently unable to answer a question that patients will certainly ask: What will an observation stay cost me compared to the same stay billed as an inpatient?

In this issue of the Journal of Hospital Medicine, Kangovi et al.[6] get a step closer to answering this question. Using 2010 to 2012 Medicare data, Kangovi and colleagues studied patient out‐of‐pocket costs per Medicare benefit period and found that the mean financial self‐pay cost per beneficiary observation stay was less ($469.42) than the 2010 inpatient deductible ($1100),[7] although about 1 in 10 observation stays exceeded the inpatient deductible. For beneficiaries with multiple observation stays per benefit period, the mean cumulative self‐pay cost ($947.40) was also less than the inpatient deductible. However, for over a quarter of beneficiaries with multiple observation stays, the cumulative patient cost exceeded the inpatient deductible. The authors also found that black beneficiaries and those with more comorbidities were more likely to have multiple observation visits per benefit period, but higher out‐of‐pocket observation liability was associated with nonblack race, lower number of chronic conditions, and not being dual eligible.

Medicare beneficiaries hospitalized as inpatients are covered by Medicare Part A, with a single deductible per benefit period, and are eligible for skilled nursing facility (SNF) coverage after 3 consecutive inpatient midnights. Medicare patients hospitalized as outpatients, including those receiving observation services, are not eligible for SNF coverage, must pay the cost of many self‐administered pharmaceuticals, and are generally responsible for 20% of each service rendered, but with the per‐service out‐of‐pocket 20% deductible capped at the equivalent to the current Part A deductible. However, there is no cumulative limit on the total out‐of‐pocket cost for outpatient observation (Part B) hospitalizations.[8]

Put in a slightly different way, while [outpatient coverage] is designed to reflect the cost of caring for each individual beneficiary, [inpatient payment structure] is designed to reflect the cost of caring for an average beneficiary.[9] Because outpatient observation payments are made per service, Medicare and beneficiary payment amounts both increase as the number of services provided increases,[9] which creates a threshold where the number and complexity of outpatient services exceeds the average inpatient stay, resulting in out‐of‐pocket observation costs exceeding the inpatient deductible. It makes sense that this threshold is more likely to be reached when the costs of multiple observation stays are added. Therefore, we should not be surprised at the findings of Kangovi et al.,[6] nor at those of the Office of Inspector General (OIG)[9] using 2012 Medicare claims data, showing higher average out‐of‐pocket patient costs for short inpatient stays compared to observation stays, but with a significant minority of out‐of‐pocket observation patient stay costs exceeding the inpatient deductible.

Dr. Kangovi and colleagues should be applauded for their efforts to address this important Medicare beneficiary issue. Yet many questions remain. First, neither the OIG study nor Kangovi et al. fully included cost of self‐administered medications in calculating patients' out‐of‐pocket patient liability. Second, Kangovi and colleagues did not account for beneficiary posthospitalization SNF costs, which would be substantially higher for any patients who did not have a qualifying 3‐day inpatient stay, including all patients hospitalized under observation. Third, both reports used data predating the 2‐midnight rule, so it is unlikely that beneficiary costs are comparable under current policy. Fewer long (>48 hours) observation stays under the 2‐midnight rule should reduce beneficiary financial burden, though this is unconfirmed. However, certain shorter, high‐acuity, procedure‐based observation stays could be more costly for patients.[9] Fourth, Kangovi et al. also did not consider patients with both an inpatient stay and an observation stay in the same benefit period; these patients would be liable for both the inpatient deductible and the outpatient fees. Fifth, to be meaningful, comparison of beneficiary out‐of‐pocket liability for inpatient versus outpatient care must occur in the context of services rendered, similar to what was proposed by the House Ways and Means Subcommittee in their Hospital Improvements for Payment draft bill.[10] Absent this, we should not conclude from this study that observation care is delivered at a discounted rate for patients when it is possible that lower out‐of‐pocket payments simply reflect, on average, fewer services rendered per observation stay when compared to an inpatient stay. Finally, the association between race, socioeconomic status, chronic conditions, and inpatient and observation stays merits further investigation. How such hospitalizations may relate to larger costs associated with lack of appropriate follow‐up care, including costs for those who have adverse consequences when they curtail or forego SNF placement, must be considered.

Even if we accept these limitations and accede that out‐of‐pocket observation cost is, on average, less than inpatient, pitfalls of observation policy remain: a cap on out‐of‐pocket financial risk for hospital care and SNF coverage are protections only afforded to those Medicare beneficiaries hospitalized as inpatients. Although the aspect of CMS' 2‐midnight rule that presumes inpatient status if a there is a physician's expectation of a medically necessary hospitalization of 2 or more midnights mitigates, but does not eliminate, the observation policy problem of uncapped out‐of‐pocket financial liability, it does not address the lack of SNF coverage following outpatient hospitalization. Further action and answers need to come from both Congress and CMS. At a recent Senate Special Committee on Aging hearing, Elizabeth Warren emphasized that CMS must accurately determine Medicare beneficiary out‐of‐pocket cost for observation care so providers can answer this question that patients undoubtedly ask.[1] CMS should be called upon to make available estimates of beneficiary costs under the 2‐midnight rule that include pharmacy charges, copayments (in the context of services rendered), and SNF costs. In addition, data should extend past beneficiary liability to detail differences in outpatient versus inpatient hospital reimbursement, systematic recovery auditing costs, and the total financial impact of maintaining 2 distinct (inpatient and outpatient) hospital reimbursement systems.[11, 12]

Congress and CMS must ultimately go beyond cost estimates and actually reform the core problems in outpatient observation policy and the Recovery Audit program charged with enforcing status determinations. Congress should pass the Improving Access to Medicare Coverage Act of 2015 (H.R. 1571 and S. 843), which would guarantee SNF coverage for Medicare beneficiaries hospitalized for 3 consecutive midnights, regardless of whether those nights are inpatient or outpatient.[13] Recovery Audit reform bills in the House (H.R. 2156)[3] and under consideration in the Senate[2] should be strongly supported. In addition, Congress and CMS should consider legislation or regulation that would cap outpatient hospitalization out‐of‐pocket liability at the inpatient Medicare beneficiary deductible. Alternatively, policymakers could finally recognize the current observation versus inpatient system for what it is: a payment structure with little clinical relevance. When the same exact medical care has 2 different hospital reimbursement rates and 2 different patient out‐of‐pocket financial liabilities, it may be time for policymakers to eliminate the false distinction altogether.

Disclosure: Nothing to report.

The problems surrounding hospital observation care and associated audits by Recovery Audit Contractors are gaining increased attention from both Congress and the Centers for Medicare & Medicaid Services (CMS).[1, 2, 3, 4, 5] On August 6, 2015, President Obama signed the NOTICE (Notice of Observation Treatment and Implication for Care Eligibility) Act (P.L. 114‐42),[4] which will require all Medicare beneficiaries receiving observation services for over 24 hours to be informed of their outpatient status. However, providers and hospitals are currently unable to answer a question that patients will certainly ask: What will an observation stay cost me compared to the same stay billed as an inpatient?

In this issue of the Journal of Hospital Medicine, Kangovi et al.[6] get a step closer to answering this question. Using 2010 to 2012 Medicare data, Kangovi and colleagues studied patient out‐of‐pocket costs per Medicare benefit period and found that the mean financial self‐pay cost per beneficiary observation stay was less ($469.42) than the 2010 inpatient deductible ($1100),[7] although about 1 in 10 observation stays exceeded the inpatient deductible. For beneficiaries with multiple observation stays per benefit period, the mean cumulative self‐pay cost ($947.40) was also less than the inpatient deductible. However, for over a quarter of beneficiaries with multiple observation stays, the cumulative patient cost exceeded the inpatient deductible. The authors also found that black beneficiaries and those with more comorbidities were more likely to have multiple observation visits per benefit period, but higher out‐of‐pocket observation liability was associated with nonblack race, lower number of chronic conditions, and not being dual eligible.

Medicare beneficiaries hospitalized as inpatients are covered by Medicare Part A, with a single deductible per benefit period, and are eligible for skilled nursing facility (SNF) coverage after 3 consecutive inpatient midnights. Medicare patients hospitalized as outpatients, including those receiving observation services, are not eligible for SNF coverage, must pay the cost of many self‐administered pharmaceuticals, and are generally responsible for 20% of each service rendered, but with the per‐service out‐of‐pocket 20% deductible capped at the equivalent to the current Part A deductible. However, there is no cumulative limit on the total out‐of‐pocket cost for outpatient observation (Part B) hospitalizations.[8]

Put in a slightly different way, while [outpatient coverage] is designed to reflect the cost of caring for each individual beneficiary, [inpatient payment structure] is designed to reflect the cost of caring for an average beneficiary.[9] Because outpatient observation payments are made per service, Medicare and beneficiary payment amounts both increase as the number of services provided increases,[9] which creates a threshold where the number and complexity of outpatient services exceeds the average inpatient stay, resulting in out‐of‐pocket observation costs exceeding the inpatient deductible. It makes sense that this threshold is more likely to be reached when the costs of multiple observation stays are added. Therefore, we should not be surprised at the findings of Kangovi et al.,[6] nor at those of the Office of Inspector General (OIG)[9] using 2012 Medicare claims data, showing higher average out‐of‐pocket patient costs for short inpatient stays compared to observation stays, but with a significant minority of out‐of‐pocket observation patient stay costs exceeding the inpatient deductible.

Dr. Kangovi and colleagues should be applauded for their efforts to address this important Medicare beneficiary issue. Yet many questions remain. First, neither the OIG study nor Kangovi et al. fully included cost of self‐administered medications in calculating patients' out‐of‐pocket patient liability. Second, Kangovi and colleagues did not account for beneficiary posthospitalization SNF costs, which would be substantially higher for any patients who did not have a qualifying 3‐day inpatient stay, including all patients hospitalized under observation. Third, both reports used data predating the 2‐midnight rule, so it is unlikely that beneficiary costs are comparable under current policy. Fewer long (>48 hours) observation stays under the 2‐midnight rule should reduce beneficiary financial burden, though this is unconfirmed. However, certain shorter, high‐acuity, procedure‐based observation stays could be more costly for patients.[9] Fourth, Kangovi et al. also did not consider patients with both an inpatient stay and an observation stay in the same benefit period; these patients would be liable for both the inpatient deductible and the outpatient fees. Fifth, to be meaningful, comparison of beneficiary out‐of‐pocket liability for inpatient versus outpatient care must occur in the context of services rendered, similar to what was proposed by the House Ways and Means Subcommittee in their Hospital Improvements for Payment draft bill.[10] Absent this, we should not conclude from this study that observation care is delivered at a discounted rate for patients when it is possible that lower out‐of‐pocket payments simply reflect, on average, fewer services rendered per observation stay when compared to an inpatient stay. Finally, the association between race, socioeconomic status, chronic conditions, and inpatient and observation stays merits further investigation. How such hospitalizations may relate to larger costs associated with lack of appropriate follow‐up care, including costs for those who have adverse consequences when they curtail or forego SNF placement, must be considered.

Even if we accept these limitations and accede that out‐of‐pocket observation cost is, on average, less than inpatient, pitfalls of observation policy remain: a cap on out‐of‐pocket financial risk for hospital care and SNF coverage are protections only afforded to those Medicare beneficiaries hospitalized as inpatients. Although the aspect of CMS' 2‐midnight rule that presumes inpatient status if a there is a physician's expectation of a medically necessary hospitalization of 2 or more midnights mitigates, but does not eliminate, the observation policy problem of uncapped out‐of‐pocket financial liability, it does not address the lack of SNF coverage following outpatient hospitalization. Further action and answers need to come from both Congress and CMS. At a recent Senate Special Committee on Aging hearing, Elizabeth Warren emphasized that CMS must accurately determine Medicare beneficiary out‐of‐pocket cost for observation care so providers can answer this question that patients undoubtedly ask.[1] CMS should be called upon to make available estimates of beneficiary costs under the 2‐midnight rule that include pharmacy charges, copayments (in the context of services rendered), and SNF costs. In addition, data should extend past beneficiary liability to detail differences in outpatient versus inpatient hospital reimbursement, systematic recovery auditing costs, and the total financial impact of maintaining 2 distinct (inpatient and outpatient) hospital reimbursement systems.[11, 12]

Congress and CMS must ultimately go beyond cost estimates and actually reform the core problems in outpatient observation policy and the Recovery Audit program charged with enforcing status determinations. Congress should pass the Improving Access to Medicare Coverage Act of 2015 (H.R. 1571 and S. 843), which would guarantee SNF coverage for Medicare beneficiaries hospitalized for 3 consecutive midnights, regardless of whether those nights are inpatient or outpatient.[13] Recovery Audit reform bills in the House (H.R. 2156)[3] and under consideration in the Senate[2] should be strongly supported. In addition, Congress and CMS should consider legislation or regulation that would cap outpatient hospitalization out‐of‐pocket liability at the inpatient Medicare beneficiary deductible. Alternatively, policymakers could finally recognize the current observation versus inpatient system for what it is: a payment structure with little clinical relevance. When the same exact medical care has 2 different hospital reimbursement rates and 2 different patient out‐of‐pocket financial liabilities, it may be time for policymakers to eliminate the false distinction altogether.

Disclosure: Nothing to report.

The problems surrounding hospital observation care and associated audits by Recovery Audit Contractors are gaining increased attention from both Congress and the Centers for Medicare & Medicaid Services (CMS).[1, 2, 3, 4, 5] On August 6, 2015, President Obama signed the NOTICE (Notice of Observation Treatment and Implication for Care Eligibility) Act (P.L. 114‐42),[4] which will require all Medicare beneficiaries receiving observation services for over 24 hours to be informed of their outpatient status. However, providers and hospitals are currently unable to answer a question that patients will certainly ask: What will an observation stay cost me compared to the same stay billed as an inpatient?

In this issue of the Journal of Hospital Medicine, Kangovi et al.[6] get a step closer to answering this question. Using 2010 to 2012 Medicare data, Kangovi and colleagues studied patient out‐of‐pocket costs per Medicare benefit period and found that the mean financial self‐pay cost per beneficiary observation stay was less ($469.42) than the 2010 inpatient deductible ($1100),[7] although about 1 in 10 observation stays exceeded the inpatient deductible. For beneficiaries with multiple observation stays per benefit period, the mean cumulative self‐pay cost ($947.40) was also less than the inpatient deductible. However, for over a quarter of beneficiaries with multiple observation stays, the cumulative patient cost exceeded the inpatient deductible. The authors also found that black beneficiaries and those with more comorbidities were more likely to have multiple observation visits per benefit period, but higher out‐of‐pocket observation liability was associated with nonblack race, lower number of chronic conditions, and not being dual eligible.

Medicare beneficiaries hospitalized as inpatients are covered by Medicare Part A, with a single deductible per benefit period, and are eligible for skilled nursing facility (SNF) coverage after 3 consecutive inpatient midnights. Medicare patients hospitalized as outpatients, including those receiving observation services, are not eligible for SNF coverage, must pay the cost of many self‐administered pharmaceuticals, and are generally responsible for 20% of each service rendered, but with the per‐service out‐of‐pocket 20% deductible capped at the equivalent to the current Part A deductible. However, there is no cumulative limit on the total out‐of‐pocket cost for outpatient observation (Part B) hospitalizations.[8]

Put in a slightly different way, while [outpatient coverage] is designed to reflect the cost of caring for each individual beneficiary, [inpatient payment structure] is designed to reflect the cost of caring for an average beneficiary.[9] Because outpatient observation payments are made per service, Medicare and beneficiary payment amounts both increase as the number of services provided increases,[9] which creates a threshold where the number and complexity of outpatient services exceeds the average inpatient stay, resulting in out‐of‐pocket observation costs exceeding the inpatient deductible. It makes sense that this threshold is more likely to be reached when the costs of multiple observation stays are added. Therefore, we should not be surprised at the findings of Kangovi et al.,[6] nor at those of the Office of Inspector General (OIG)[9] using 2012 Medicare claims data, showing higher average out‐of‐pocket patient costs for short inpatient stays compared to observation stays, but with a significant minority of out‐of‐pocket observation patient stay costs exceeding the inpatient deductible.

Dr. Kangovi and colleagues should be applauded for their efforts to address this important Medicare beneficiary issue. Yet many questions remain. First, neither the OIG study nor Kangovi et al. fully included cost of self‐administered medications in calculating patients' out‐of‐pocket patient liability. Second, Kangovi and colleagues did not account for beneficiary posthospitalization SNF costs, which would be substantially higher for any patients who did not have a qualifying 3‐day inpatient stay, including all patients hospitalized under observation. Third, both reports used data predating the 2‐midnight rule, so it is unlikely that beneficiary costs are comparable under current policy. Fewer long (>48 hours) observation stays under the 2‐midnight rule should reduce beneficiary financial burden, though this is unconfirmed. However, certain shorter, high‐acuity, procedure‐based observation stays could be more costly for patients.[9] Fourth, Kangovi et al. also did not consider patients with both an inpatient stay and an observation stay in the same benefit period; these patients would be liable for both the inpatient deductible and the outpatient fees. Fifth, to be meaningful, comparison of beneficiary out‐of‐pocket liability for inpatient versus outpatient care must occur in the context of services rendered, similar to what was proposed by the House Ways and Means Subcommittee in their Hospital Improvements for Payment draft bill.[10] Absent this, we should not conclude from this study that observation care is delivered at a discounted rate for patients when it is possible that lower out‐of‐pocket payments simply reflect, on average, fewer services rendered per observation stay when compared to an inpatient stay. Finally, the association between race, socioeconomic status, chronic conditions, and inpatient and observation stays merits further investigation. How such hospitalizations may relate to larger costs associated with lack of appropriate follow‐up care, including costs for those who have adverse consequences when they curtail or forego SNF placement, must be considered.

Even if we accept these limitations and accede that out‐of‐pocket observation cost is, on average, less than inpatient, pitfalls of observation policy remain: a cap on out‐of‐pocket financial risk for hospital care and SNF coverage are protections only afforded to those Medicare beneficiaries hospitalized as inpatients. Although the aspect of CMS' 2‐midnight rule that presumes inpatient status if a there is a physician's expectation of a medically necessary hospitalization of 2 or more midnights mitigates, but does not eliminate, the observation policy problem of uncapped out‐of‐pocket financial liability, it does not address the lack of SNF coverage following outpatient hospitalization. Further action and answers need to come from both Congress and CMS. At a recent Senate Special Committee on Aging hearing, Elizabeth Warren emphasized that CMS must accurately determine Medicare beneficiary out‐of‐pocket cost for observation care so providers can answer this question that patients undoubtedly ask.[1] CMS should be called upon to make available estimates of beneficiary costs under the 2‐midnight rule that include pharmacy charges, copayments (in the context of services rendered), and SNF costs. In addition, data should extend past beneficiary liability to detail differences in outpatient versus inpatient hospital reimbursement, systematic recovery auditing costs, and the total financial impact of maintaining 2 distinct (inpatient and outpatient) hospital reimbursement systems.[11, 12]

Congress and CMS must ultimately go beyond cost estimates and actually reform the core problems in outpatient observation policy and the Recovery Audit program charged with enforcing status determinations. Congress should pass the Improving Access to Medicare Coverage Act of 2015 (H.R. 1571 and S. 843), which would guarantee SNF coverage for Medicare beneficiaries hospitalized for 3 consecutive midnights, regardless of whether those nights are inpatient or outpatient.[13] Recovery Audit reform bills in the House (H.R. 2156)[3] and under consideration in the Senate[2] should be strongly supported. In addition, Congress and CMS should consider legislation or regulation that would cap outpatient hospitalization out‐of‐pocket liability at the inpatient Medicare beneficiary deductible. Alternatively, policymakers could finally recognize the current observation versus inpatient system for what it is: a payment structure with little clinical relevance. When the same exact medical care has 2 different hospital reimbursement rates and 2 different patient out‐of‐pocket financial liabilities, it may be time for policymakers to eliminate the false distinction altogether.

Disclosure: Nothing to report.

Medicare patients are increasingly hospitalized as outpatients under observation. From 2006 to 2012, outpatient services grew nationally by 28.5%, whereas inpatient discharges decreased by 12.6% per Medicare beneficiary.[1] This increased use of observation stays for hospitalized Medicare beneficiaries and the recent Centers for Medicare & Medicaid Services (CMS) 2‐Midnight rule for determination of visit status are increasing areas of concern for hospitals, policymakers, and the public,[2] as patients hospitalized under observation are not covered by Medicare Part A hospital insurance, are subject to uncapped out‐of‐pocket charges under Medicare Part B, and may be billed by the hospital for certain medications. Additionally, Medicare beneficiaries hospitalized in outpatient status, which includes all hospitalizations under observation, do not qualify for skilled nursing facility care benefits after discharge, which requires a stay that spans at least 3 consecutive midnights as an inpatient.[3]

In contrast, the federal Recovery Audit program, previously called and still commonly referred to as the Recovery Audit Contractor (RAC) program, responsible for postpayment review of inpatient claims, has received relatively little attention. Established in 2006, and fully operationalized in federal fiscal year (FY) 2010,[4] RACs are private government contractors granted the authority to audit hospital charts for appropriate medical necessity, which can consider whether the care delivered was indicated and whether it was delivered in the appropriate Medicare visit status, outpatient or inpatient. Criteria for hospitalization status (inpatient vs outpatient) as defined in the Medicare Conditions of Participation, often allow for subjectivity (medical judgment) in determining which status is appropriate.[5] Hospitals may contest RAC decisions and payment denials through a preappeals discussion period, then through a 5‐level appeals process. Although early appeals occur between the hospital and private contractors, appeals reaching level 3 are heard by the Department of Health and Human Services (HHS) Office of Medicare Hearings and Appeals (OMHA) Administrative Law Judges (ALJ). Levels 4 (Medicare Appeals Council) and 5 (United States District Court) appeals are also handled by the federal government.[6]

Medicare fraud and abuse should not be tolerated, and systematic surveillance needs to be an integral part of the Medicare program.[4] However, there are increasing concerns that the RAC program has resulted in overaggressive denials.[7, 8] Unlike other Medicare contractors, RAC auditors are paid a contingency fee based on the percentage of hospital payment recouped for cases they audit and deny for improper payment.[4] RACs are not subject to any financial penalty for cases they deny but are overturned in the discussion period or in the appeals process. This may create an incentive system that financially encourages RACs to assert improper payment, and the current system lacks both transparency and clear performance metrics for auditors. Of particular concern are Medicare Part A complex reviews, the most fiscally impactful area of RAC activity. According to CMS FY 2013 data, 41.1% of all claims with collections were complex reviews, yet these claims accounted for almost all (95.2%) of total dollars recovered by the RACs, with almost all (96%) dollars recovered being from Part A claims.[9] Complex reviews involve an auditor retrospectively and manually reviewing a medical record and then using his or her clinical and related professional judgment to decide whether the care was medically necessary. This is compared to automated coding or billing reviews, which are based solely on claims data.

Increased RAC activity and the willingness of hospitals to challenge RAC findings of improper payment has led to an increase in appeals volume that has overloaded the appeals process. On March 13, 2013, CMS offered hospitals the ability to rebill Medicare Part B as an appeals alternative.[10] This did not temper level 3 appeals requests received by the OMHA, which increased from 1250 per week in January 2012 to over 15,000 per week by November 2013.[11] Citing an overwhelmingly increased rate of appeal submissions and the resultant backlog, the OMHA decided to freeze new hospital appeals assignments in December 2013.[11] In another attempt to clear the backlog, on August 29, 2014, CMS offered a settlement that would pay hospitals 68% of the net allowable amount of the original Part A claim (minus any beneficiary deductibles) if a hospital agreed to concede all of its eligible appeals.[12] Notably, cases settled under this agreement would remain officially categorized as denied for improper payment.

The HHS Office of Inspector General (OIG)[4] and the CMS[9, 13, 14] have produced recent reports of RAC auditing and appeals activity that contain variable numbers that conflict with hospital accounts of auditing and appeals activity.[15, 16] In addition to these conflicting reports, little is known about RAC auditing of individual programs over time, the length of time cases spend in appeals, and staff required to navigate the audit and appeals processes. Given these questions, and the importance of RAC auditing pressure in the growth of hospital observation care, we conducted a retrospective descriptive study of all RAC activity for complex Medicare Part A alleged overpayment determinations at the Johns Hopkins Hospital, the University of Utah, and University of Wisconsin Hospital and Clinics for calendar years 2010 to 2013.

METHODS

The University of Wisconsin‐Madison Health Sciences institutional review board (IRB) and the Johns Hopkins Hospital IRB did not require review of this study. The University of Utah received an exemption. All 3 hospitals are tertiary care academic medical centers. The University of Wisconsin Hospital and Clinics (UWHC) is a 592‐bed hospital located in Madison, Wisconsin,[17] the Johns Hopkins Hospital (JHH) is a 1145‐bed medical center located in Baltimore, Maryland,[18] and the University of Utah Hospital (UU) is a 770‐bed facility in Salt Lake City, Utah (information available upon request). Each hospital is under a different RAC, representing 3 of the 4 RAC regions, and each is under a different Medicare Administrative Contractor, contractors responsible for level 1 appeals. The 3 hospitals have the same Qualified Independent Contractor responsible for level 2 appeals.

For the purposes of this study, any chart or medical record requested for review by an RAC was considered a medical necessity chart request or an audit. The terms overpayment determinations and denials were used interchangeably to describe audits the RACs alleged did not meet medical necessity for Medicare Part A billing. As previously described, the term medical necessity specifically considered not only whether actual medical services were appropriate, but also whether the services were delivered in the appropriate status, outpatient or inpatient. Appeals and/or request for discussion were cases where the overpayment determination was disputed and challenged by the hospital.

All complex review Medicare Part A RAC medical record requests by date of RAC request from the official start of the RAC program, January 1, 2010,[4] to December 31, 2013, were included in this study. Medical record requests for automated reviews that related to coding and billing clarifications were not included in this study, nor were complex Medicare Part B reviews, complex reviews for inpatient rehabilitation facilities, or psychiatric day hospitalizations. Notably, JHH is a Periodic Interim Payment (PIP) Medicare hospital, which is a reimbursement mechanism where biweekly payments [are] made to a Provider enrolled in the PIP program, and are based on the hospital's estimate of applicable Medicare reimbursement for the current cost report period.[19] Because PIP payments are made collectively to the hospital based on historical data, adjustments for individual inpatients could not be easily adjudicated and processed. Due to the increased complexity of this reimbursement mechanism, RAC audits did not begin at JHH until 2012. In addition, in contrast to the other 2 institutions, all of the RAC complex review audits at JHH in 2013 were for Part B cases, such as disputing need for intensity‐modulated radiation therapy versus conventional radiation therapy, or contesting the medical necessity of blepharoplasty. As a result, JHH had complex Part A review audits only for 2012 during the study time period. All data were deidentified prior to review by investigators.

As RACs can audit charts for up to 3 years after the bill is submitted,[13] a chart request in 2013 may represent a 2010 hospitalization, but for purposes of this study, was logged as a 2013 case. There currently is no standard methodology to calculate time spent in appeals. The UWHC and JHH calculate time in discussion or appeals from the day the discussion or appeal was initiated by the hospital, and the UU calculates the time in appeals from the date of the findings letter from the RAC, which makes comparable recorded time in appeals longer at UU (estimated 510 days for 20112013 cases, up to 120 days for 2010 cases).Time in appeals includes all cases that remain in the discussion or appeals process as of June 30, 2014.

The RAC process is as follows (Tables 1 and 2):

1. The RAC requests hospital claims (RAC Medical Necessity Chart Requests [Audits]).
2. The RAC either concludes the hospital claim was compliant as filed/paid and the process ends or the RAC asserts improper payment and requests repayment (RAC Overpayment Determinations of Requested Charts [Denials]).
3. The hospital makes an initial decision to not contest the RAC decision (and repay), or to dispute the decision (Hospital Disputes Overpayment Determination [Appeal/Discussion]). Prior to filing an appeal, the hospital may request a discussion of the case with an RAC medical director, during which the RAC medical director can overturn the original determination. If the RAC declines to overturn the decision in discussion, the hospital may proceed with a formal appeal. Although CMS does not calculate the discussion period as part of the appeals process,[12] overpayment determinations contested by the hospital in either discussion or appeal represent the sum total of RAC denials disputed by the hospital.

4. Contested cases have 1 of 4 outcomes:

   • Contested overpayment determinations can be decided in favor of the hospital (Discussion or Appeal Decided in Favor of Hospital or RAC Withdrew)

   • Contested overpayment determinations can be decided in favor of the RAC during the appeal process, and either the hospital exhausts the appeal process or elects not to take the appeal to the next level. Although the appeals process has 5 levels, no cases at our 3 hospitals have reached level 4 or 5, so cases without a decision to date remain in appeals at 1 of the first 3 levels (Case Still in Discussion or Appeals).[4]
   • Hospital may miss an appeal deadline (Hospital Missed Appeal Deadline at Any Level) and the case is automatically decided in favor of the RAC.
   • As of March 13, 2013,[10] for appeals that meet certain criteria and involve dispute over the billing of hospital services under Part A, CMS allowed hospitals to withdraw an appeal and rebill Medicare Part B. Prior to this time, hospitals could rebill for a very limited list of ancillary Part B Only services, and only within the 1‐year timely filing period.[13] Due to the lengthy appeals process and associated legal and administrative costs, hospitals may not agree with the RAC determination but make a business decision to recoup some payment under this mechanism (Hospital Chose to Rebill as Part B During Discussion or Appeals Process).

The administration at each hospital provided labor estimates for workforce dedicated to the review process generated by the RACs based on hourly accounting of one‐quarter of work during 2012, updated to FY 2014 accounting (Table 3). Concurrent case management status determination work was not included in these numbers due to the difficulty in solely attributing concurrent review workforce numbers to the RACs, as concurrent case management is a CMS Condition of Participation irrespective of the RAC program.

RESULTS

CONCLUSIONS

In this study of 3 academic medical centers, there was a more than 2‐fold increase in RAC audits and a nearly 3‐fold rise in overpayment determinations over the last 2 calendar years of the study, resulting in a more than 3‐fold increase in appeals or requests for discussion in 2012 to 2013 compared to 2010 to 2011. In addition, although CMS manually reviews less than 0.3% of submitted claims each year through programs such as the Recovery Audit Program,[9] at the study hospitals, complex Part A RAC audits occurred at a rate more than 25 times that (8.0%), suggesting that these types of claims are a disproportionate focus of auditing activity. The high overall complex Part A audit rate, accompanied by acceleration of RAC activity and the hospitals' increased willingness to dispute RAC overpayment determinations each year, if representative of similar institutions, would explain the appeals backlog, most notably at the ALJ (level 3) level. Importantly, none of these Part A complex review denials contested a need for the medical care delivered, demonstrating that much of the RAC process at the hospitals focused exclusively on the nuances of medical necessity and variation in interpretation of CMS guidelines that related to whether hospital care should be provided under inpatient or outpatient status.

These data also show continued aggressive RAC audit activity despite an increasing overturn rate in favor of the hospitals in discussion or on appeal each year (from 36.0% in 2010 to 68.0% in 2013). The majority of the hospitals' successful decisions occurred in the discussion period, when the hospital had the opportunity to review the denial with the RAC medical director, a physician, prior to beginning the official appeals process. The 33% overturn rate found in the discussion period represents an error rate by the initial RAC auditors that was internally verified by the RAC medical director. The RAC internal error rate was replicated at 3 different RACs, highlighting internal process problems across the RAC system. This is concerning, because the discussion period is not considered part of the formal appeals process, so these cases are not appearing in CMS or OIG reports of RAC activity, leading to an underestimation of the true successful overturned denial rates at the 3 study hospitals, and likely many other hospitals.

The study hospitals are also being denied timely due process and payments for services delivered. The hospitals currently face an appeals process that, on average, far exceeds 500 days. In almost half of the contested overpayment determinations, the hospitals withdrew a case or rebilled Part B, not due to agreement with a RAC determination, but to avoid the lengthy, cumbersome, and expensive appeals process and/or to minimize the risk of losing the amount of the entire Part A claim. This is concerning, as cases withdrawn in the appeals process are considered improper payments in federal reports, despite a large number of these cases being withdrawn simply to avoid an inefficient appeals process. Notably, Medicare is not adhering to its own rules, which require appeals to be heard in a timely manner, specifically 60 days for level 1 or 2 appeals, and 90 days for a level 3 appeal,[6, 20] even though the hospitals lost the ability to appeal cases when they missed a deadline. Even if hospitals agreed to the recent 68% settlement offer[12] from CMS, appeals may reaccumulate without auditing reform. As noted earlier, this recent settlement offer came more than a year after the enhanced ability to rebill denied Part A claims for Part B, yet the backlog remains.

This study also showed that a large hospital workforce is required to manage the lengthy audit and appeals process generated by RACs. These staff are paid with funds that could be used to provide direct patient care or internal process improvement. The federal government also directly pays for unchecked RAC activity through the complex appeals process. Any report of dollars that RACs recoup for the federal government should be considered in light of their administrative costs to hospitals and government contractors, and direct costs at the federal level.

This study also showed that RACs audited the 3 institutions differently, despite similar willingness of the hospitals to dispute overpayment determinations and similar hospital success rates in appeals or discussion, suggesting that hospital compliance with Medicare policy was not the driver of variable RAC activity. This variation may be due to factors not apparent in this study, such as variable RAC interpretation of federal policy, a decision of a particular RAC to focus on complex Medicare Part B or automated reviews instead of complex Part A reviews, or RAC workforce differences that are not specific to the hospitals. Regardless, the variation in audit activity suggests that greater transparency and accountability in RAC activity is merited.

Perhaps most importantly, this study highlights factors that may help explain differing auditing and appeals numbers reported by the OIG,[4] CMS,[9, 13, 14] and hospitals.[15, 16] Given the marked increase in RAC activity over the last 4 years, the 2010 and 2011 data included in a recent OIG report[4] likely do not represent current auditing and appeals practice. With regard to the CMS reports,[9, 13, 14] although CMS included FY 2013[9] activity in its most recent report, it did not account for denials overturned in the discussion period, as these are not technically appeals, even though these are contested cases decided in favor of the hospital. This most recent CMS report[9] uses overpayment determinations from FY 2013, yet counts appeals and decisions that occurred in 2013, with the comment that these decisions may be for overpayment determinations prior to 2013. The CMS reports also variably combine automated, semiautomated, complex Part A, and complex Part B claims in its reports, making interpretation challenging. Finally, although CMS reported an increase in improper payments recovered from FY 2011[14] ($939 million) to FY 2012[13] ($2.4 billion) to FY 2013[9] ($3.75 billion), this is at least partly a reflection of increased RAC activity as demonstrated in this study, and may reflect the fact that many hospitals do not have the resources to continually appeal or choose not to contest these cases based on a financial business decision. Importantly, these numbers now far exceed recoupment in other quality programs, such as the Readmissions Reduction Program (estimated $428 million next FY),[21] indicating the increased fiscal impact of the RAC program on hospital reimbursement.

To increase accuracy, future federal reports of auditing and appeals should detail and include cases overturned in the discussion period, and carefully describe the denominator of total audits and appeals given the likelihood that many appeals in a given year will not have a decision in that year. Percent of total Medicare claims subject to complex Part A audit should be stated. Reports should also identify and consider an alternative classification for complex Part A cases the hospital elects to rebill under Medicare Part B, and also detail on what grounds medical necessity is being contested (eg, whether the actual care delivered was not necessary or if it is an outpatient versus inpatient billing issue). Time spent in the appeals process must also be reported. Complex Part A, complex Part B, semiautomated, and automated reviews should also be considered separately, and dates of reported audits and appeals must be as current as possible in this rapidly changing environment.

In this study, RACs conducted complex Part A audits at a rate 25 times the CMS‐reported overall audit rate, confirming complex Part A audits are a particular focus of RAC activity. There was a more than doubling of RAC audits at the study hospitals from the years 2010 ‐ 2011 to 2012 ‐ 2013 and a nearly 3‐fold increase in overpayment determinations. Concomitantly, the more than 3‐fold increase in appeals and discussion volume over this same time period was consistent with the development of the current national appeals backlog. The 3 study hospitals won a greater percentage of contested cases each year, from approximately one‐third of cases in 2010 to two‐thirds of cases with decisions in 2013, but there was no appreciable decrease in RAC overpayment determinations over that time period. The majority of successfully challenged cases were won in discussion, favorable decisions for hospitals not appearing in federal appeals reports. Time in appeals exceeded 550 days, causing the hospitals to withdraw some cases to avoid the lengthy appeals process and/or to minimize the risk of losing the amount of the entire Part A claim. The hospitals also lost a small number of appeals by missing a filing deadline, yet there was no reciprocal case concession when the appeals system missed a deadline. RACs found no cases of care at the 3 hospitals that should not have been delivered, but rather challenged the status determination (inpatient vs outpatient) to dispute medical necessity of care delivered. Finally, an average of approximately 5 FTEs at each institution were employed in the audits and appeals process. These data support a need for systematic improvements in the RAC system so that fair, constructive, and cost‐efficient surveillance of the Medicare program can be realized.

Medicare patients are increasingly hospitalized as outpatients under observation. From 2006 to 2012, outpatient services grew nationally by 28.5%, whereas inpatient discharges decreased by 12.6% per Medicare beneficiary.[1] This increased use of observation stays for hospitalized Medicare beneficiaries and the recent Centers for Medicare & Medicaid Services (CMS) 2‐Midnight rule for determination of visit status are increasing areas of concern for hospitals, policymakers, and the public,[2] as patients hospitalized under observation are not covered by Medicare Part A hospital insurance, are subject to uncapped out‐of‐pocket charges under Medicare Part B, and may be billed by the hospital for certain medications. Additionally, Medicare beneficiaries hospitalized in outpatient status, which includes all hospitalizations under observation, do not qualify for skilled nursing facility care benefits after discharge, which requires a stay that spans at least 3 consecutive midnights as an inpatient.[3]

In contrast, the federal Recovery Audit program, previously called and still commonly referred to as the Recovery Audit Contractor (RAC) program, responsible for postpayment review of inpatient claims, has received relatively little attention. Established in 2006, and fully operationalized in federal fiscal year (FY) 2010,[4] RACs are private government contractors granted the authority to audit hospital charts for appropriate medical necessity, which can consider whether the care delivered was indicated and whether it was delivered in the appropriate Medicare visit status, outpatient or inpatient. Criteria for hospitalization status (inpatient vs outpatient) as defined in the Medicare Conditions of Participation, often allow for subjectivity (medical judgment) in determining which status is appropriate.[5] Hospitals may contest RAC decisions and payment denials through a preappeals discussion period, then through a 5‐level appeals process. Although early appeals occur between the hospital and private contractors, appeals reaching level 3 are heard by the Department of Health and Human Services (HHS) Office of Medicare Hearings and Appeals (OMHA) Administrative Law Judges (ALJ). Levels 4 (Medicare Appeals Council) and 5 (United States District Court) appeals are also handled by the federal government.[6]

Medicare fraud and abuse should not be tolerated, and systematic surveillance needs to be an integral part of the Medicare program.[4] However, there are increasing concerns that the RAC program has resulted in overaggressive denials.[7, 8] Unlike other Medicare contractors, RAC auditors are paid a contingency fee based on the percentage of hospital payment recouped for cases they audit and deny for improper payment.[4] RACs are not subject to any financial penalty for cases they deny but are overturned in the discussion period or in the appeals process. This may create an incentive system that financially encourages RACs to assert improper payment, and the current system lacks both transparency and clear performance metrics for auditors. Of particular concern are Medicare Part A complex reviews, the most fiscally impactful area of RAC activity. According to CMS FY 2013 data, 41.1% of all claims with collections were complex reviews, yet these claims accounted for almost all (95.2%) of total dollars recovered by the RACs, with almost all (96%) dollars recovered being from Part A claims.[9] Complex reviews involve an auditor retrospectively and manually reviewing a medical record and then using his or her clinical and related professional judgment to decide whether the care was medically necessary. This is compared to automated coding or billing reviews, which are based solely on claims data.

Increased RAC activity and the willingness of hospitals to challenge RAC findings of improper payment has led to an increase in appeals volume that has overloaded the appeals process. On March 13, 2013, CMS offered hospitals the ability to rebill Medicare Part B as an appeals alternative.[10] This did not temper level 3 appeals requests received by the OMHA, which increased from 1250 per week in January 2012 to over 15,000 per week by November 2013.[11] Citing an overwhelmingly increased rate of appeal submissions and the resultant backlog, the OMHA decided to freeze new hospital appeals assignments in December 2013.[11] In another attempt to clear the backlog, on August 29, 2014, CMS offered a settlement that would pay hospitals 68% of the net allowable amount of the original Part A claim (minus any beneficiary deductibles) if a hospital agreed to concede all of its eligible appeals.[12] Notably, cases settled under this agreement would remain officially categorized as denied for improper payment.

The HHS Office of Inspector General (OIG)[4] and the CMS[9, 13, 14] have produced recent reports of RAC auditing and appeals activity that contain variable numbers that conflict with hospital accounts of auditing and appeals activity.[15, 16] In addition to these conflicting reports, little is known about RAC auditing of individual programs over time, the length of time cases spend in appeals, and staff required to navigate the audit and appeals processes. Given these questions, and the importance of RAC auditing pressure in the growth of hospital observation care, we conducted a retrospective descriptive study of all RAC activity for complex Medicare Part A alleged overpayment determinations at the Johns Hopkins Hospital, the University of Utah, and University of Wisconsin Hospital and Clinics for calendar years 2010 to 2013.

METHODS

The University of Wisconsin‐Madison Health Sciences institutional review board (IRB) and the Johns Hopkins Hospital IRB did not require review of this study. The University of Utah received an exemption. All 3 hospitals are tertiary care academic medical centers. The University of Wisconsin Hospital and Clinics (UWHC) is a 592‐bed hospital located in Madison, Wisconsin,[17] the Johns Hopkins Hospital (JHH) is a 1145‐bed medical center located in Baltimore, Maryland,[18] and the University of Utah Hospital (UU) is a 770‐bed facility in Salt Lake City, Utah (information available upon request). Each hospital is under a different RAC, representing 3 of the 4 RAC regions, and each is under a different Medicare Administrative Contractor, contractors responsible for level 1 appeals. The 3 hospitals have the same Qualified Independent Contractor responsible for level 2 appeals.

For the purposes of this study, any chart or medical record requested for review by an RAC was considered a medical necessity chart request or an audit. The terms overpayment determinations and denials were used interchangeably to describe audits the RACs alleged did not meet medical necessity for Medicare Part A billing. As previously described, the term medical necessity specifically considered not only whether actual medical services were appropriate, but also whether the services were delivered in the appropriate status, outpatient or inpatient. Appeals and/or request for discussion were cases where the overpayment determination was disputed and challenged by the hospital.

All complex review Medicare Part A RAC medical record requests by date of RAC request from the official start of the RAC program, January 1, 2010,[4] to December 31, 2013, were included in this study. Medical record requests for automated reviews that related to coding and billing clarifications were not included in this study, nor were complex Medicare Part B reviews, complex reviews for inpatient rehabilitation facilities, or psychiatric day hospitalizations. Notably, JHH is a Periodic Interim Payment (PIP) Medicare hospital, which is a reimbursement mechanism where biweekly payments [are] made to a Provider enrolled in the PIP program, and are based on the hospital's estimate of applicable Medicare reimbursement for the current cost report period.[19] Because PIP payments are made collectively to the hospital based on historical data, adjustments for individual inpatients could not be easily adjudicated and processed. Due to the increased complexity of this reimbursement mechanism, RAC audits did not begin at JHH until 2012. In addition, in contrast to the other 2 institutions, all of the RAC complex review audits at JHH in 2013 were for Part B cases, such as disputing need for intensity‐modulated radiation therapy versus conventional radiation therapy, or contesting the medical necessity of blepharoplasty. As a result, JHH had complex Part A review audits only for 2012 during the study time period. All data were deidentified prior to review by investigators.

As RACs can audit charts for up to 3 years after the bill is submitted,[13] a chart request in 2013 may represent a 2010 hospitalization, but for purposes of this study, was logged as a 2013 case. There currently is no standard methodology to calculate time spent in appeals. The UWHC and JHH calculate time in discussion or appeals from the day the discussion or appeal was initiated by the hospital, and the UU calculates the time in appeals from the date of the findings letter from the RAC, which makes comparable recorded time in appeals longer at UU (estimated 510 days for 20112013 cases, up to 120 days for 2010 cases).Time in appeals includes all cases that remain in the discussion or appeals process as of June 30, 2014.

The RAC process is as follows (Tables 1 and 2):

1. The RAC requests hospital claims (RAC Medical Necessity Chart Requests [Audits]).
2. The RAC either concludes the hospital claim was compliant as filed/paid and the process ends or the RAC asserts improper payment and requests repayment (RAC Overpayment Determinations of Requested Charts [Denials]).
3. The hospital makes an initial decision to not contest the RAC decision (and repay), or to dispute the decision (Hospital Disputes Overpayment Determination [Appeal/Discussion]). Prior to filing an appeal, the hospital may request a discussion of the case with an RAC medical director, during which the RAC medical director can overturn the original determination. If the RAC declines to overturn the decision in discussion, the hospital may proceed with a formal appeal. Although CMS does not calculate the discussion period as part of the appeals process,[12] overpayment determinations contested by the hospital in either discussion or appeal represent the sum total of RAC denials disputed by the hospital.

4. Contested cases have 1 of 4 outcomes:

   • Contested overpayment determinations can be decided in favor of the hospital (Discussion or Appeal Decided in Favor of Hospital or RAC Withdrew)

   • Contested overpayment determinations can be decided in favor of the RAC during the appeal process, and either the hospital exhausts the appeal process or elects not to take the appeal to the next level. Although the appeals process has 5 levels, no cases at our 3 hospitals have reached level 4 or 5, so cases without a decision to date remain in appeals at 1 of the first 3 levels (Case Still in Discussion or Appeals).[4]
   • Hospital may miss an appeal deadline (Hospital Missed Appeal Deadline at Any Level) and the case is automatically decided in favor of the RAC.
   • As of March 13, 2013,[10] for appeals that meet certain criteria and involve dispute over the billing of hospital services under Part A, CMS allowed hospitals to withdraw an appeal and rebill Medicare Part B. Prior to this time, hospitals could rebill for a very limited list of ancillary Part B Only services, and only within the 1‐year timely filing period.[13] Due to the lengthy appeals process and associated legal and administrative costs, hospitals may not agree with the RAC determination but make a business decision to recoup some payment under this mechanism (Hospital Chose to Rebill as Part B During Discussion or Appeals Process).

The administration at each hospital provided labor estimates for workforce dedicated to the review process generated by the RACs based on hourly accounting of one‐quarter of work during 2012, updated to FY 2014 accounting (Table 3). Concurrent case management status determination work was not included in these numbers due to the difficulty in solely attributing concurrent review workforce numbers to the RACs, as concurrent case management is a CMS Condition of Participation irrespective of the RAC program.

RESULTS

CONCLUSIONS

In this study of 3 academic medical centers, there was a more than 2‐fold increase in RAC audits and a nearly 3‐fold rise in overpayment determinations over the last 2 calendar years of the study, resulting in a more than 3‐fold increase in appeals or requests for discussion in 2012 to 2013 compared to 2010 to 2011. In addition, although CMS manually reviews less than 0.3% of submitted claims each year through programs such as the Recovery Audit Program,[9] at the study hospitals, complex Part A RAC audits occurred at a rate more than 25 times that (8.0%), suggesting that these types of claims are a disproportionate focus of auditing activity. The high overall complex Part A audit rate, accompanied by acceleration of RAC activity and the hospitals' increased willingness to dispute RAC overpayment determinations each year, if representative of similar institutions, would explain the appeals backlog, most notably at the ALJ (level 3) level. Importantly, none of these Part A complex review denials contested a need for the medical care delivered, demonstrating that much of the RAC process at the hospitals focused exclusively on the nuances of medical necessity and variation in interpretation of CMS guidelines that related to whether hospital care should be provided under inpatient or outpatient status.

These data also show continued aggressive RAC audit activity despite an increasing overturn rate in favor of the hospitals in discussion or on appeal each year (from 36.0% in 2010 to 68.0% in 2013). The majority of the hospitals' successful decisions occurred in the discussion period, when the hospital had the opportunity to review the denial with the RAC medical director, a physician, prior to beginning the official appeals process. The 33% overturn rate found in the discussion period represents an error rate by the initial RAC auditors that was internally verified by the RAC medical director. The RAC internal error rate was replicated at 3 different RACs, highlighting internal process problems across the RAC system. This is concerning, because the discussion period is not considered part of the formal appeals process, so these cases are not appearing in CMS or OIG reports of RAC activity, leading to an underestimation of the true successful overturned denial rates at the 3 study hospitals, and likely many other hospitals.

The study hospitals are also being denied timely due process and payments for services delivered. The hospitals currently face an appeals process that, on average, far exceeds 500 days. In almost half of the contested overpayment determinations, the hospitals withdrew a case or rebilled Part B, not due to agreement with a RAC determination, but to avoid the lengthy, cumbersome, and expensive appeals process and/or to minimize the risk of losing the amount of the entire Part A claim. This is concerning, as cases withdrawn in the appeals process are considered improper payments in federal reports, despite a large number of these cases being withdrawn simply to avoid an inefficient appeals process. Notably, Medicare is not adhering to its own rules, which require appeals to be heard in a timely manner, specifically 60 days for level 1 or 2 appeals, and 90 days for a level 3 appeal,[6, 20] even though the hospitals lost the ability to appeal cases when they missed a deadline. Even if hospitals agreed to the recent 68% settlement offer[12] from CMS, appeals may reaccumulate without auditing reform. As noted earlier, this recent settlement offer came more than a year after the enhanced ability to rebill denied Part A claims for Part B, yet the backlog remains.

This study also showed that a large hospital workforce is required to manage the lengthy audit and appeals process generated by RACs. These staff are paid with funds that could be used to provide direct patient care or internal process improvement. The federal government also directly pays for unchecked RAC activity through the complex appeals process. Any report of dollars that RACs recoup for the federal government should be considered in light of their administrative costs to hospitals and government contractors, and direct costs at the federal level.

This study also showed that RACs audited the 3 institutions differently, despite similar willingness of the hospitals to dispute overpayment determinations and similar hospital success rates in appeals or discussion, suggesting that hospital compliance with Medicare policy was not the driver of variable RAC activity. This variation may be due to factors not apparent in this study, such as variable RAC interpretation of federal policy, a decision of a particular RAC to focus on complex Medicare Part B or automated reviews instead of complex Part A reviews, or RAC workforce differences that are not specific to the hospitals. Regardless, the variation in audit activity suggests that greater transparency and accountability in RAC activity is merited.

Perhaps most importantly, this study highlights factors that may help explain differing auditing and appeals numbers reported by the OIG,[4] CMS,[9, 13, 14] and hospitals.[15, 16] Given the marked increase in RAC activity over the last 4 years, the 2010 and 2011 data included in a recent OIG report[4] likely do not represent current auditing and appeals practice. With regard to the CMS reports,[9, 13, 14] although CMS included FY 2013[9] activity in its most recent report, it did not account for denials overturned in the discussion period, as these are not technically appeals, even though these are contested cases decided in favor of the hospital. This most recent CMS report[9] uses overpayment determinations from FY 2013, yet counts appeals and decisions that occurred in 2013, with the comment that these decisions may be for overpayment determinations prior to 2013. The CMS reports also variably combine automated, semiautomated, complex Part A, and complex Part B claims in its reports, making interpretation challenging. Finally, although CMS reported an increase in improper payments recovered from FY 2011[14] ($939 million) to FY 2012[13] ($2.4 billion) to FY 2013[9] ($3.75 billion), this is at least partly a reflection of increased RAC activity as demonstrated in this study, and may reflect the fact that many hospitals do not have the resources to continually appeal or choose not to contest these cases based on a financial business decision. Importantly, these numbers now far exceed recoupment in other quality programs, such as the Readmissions Reduction Program (estimated $428 million next FY),[21] indicating the increased fiscal impact of the RAC program on hospital reimbursement.

To increase accuracy, future federal reports of auditing and appeals should detail and include cases overturned in the discussion period, and carefully describe the denominator of total audits and appeals given the likelihood that many appeals in a given year will not have a decision in that year. Percent of total Medicare claims subject to complex Part A audit should be stated. Reports should also identify and consider an alternative classification for complex Part A cases the hospital elects to rebill under Medicare Part B, and also detail on what grounds medical necessity is being contested (eg, whether the actual care delivered was not necessary or if it is an outpatient versus inpatient billing issue). Time spent in the appeals process must also be reported. Complex Part A, complex Part B, semiautomated, and automated reviews should also be considered separately, and dates of reported audits and appeals must be as current as possible in this rapidly changing environment.

In this study, RACs conducted complex Part A audits at a rate 25 times the CMS‐reported overall audit rate, confirming complex Part A audits are a particular focus of RAC activity. There was a more than doubling of RAC audits at the study hospitals from the years 2010 ‐ 2011 to 2012 ‐ 2013 and a nearly 3‐fold increase in overpayment determinations. Concomitantly, the more than 3‐fold increase in appeals and discussion volume over this same time period was consistent with the development of the current national appeals backlog. The 3 study hospitals won a greater percentage of contested cases each year, from approximately one‐third of cases in 2010 to two‐thirds of cases with decisions in 2013, but there was no appreciable decrease in RAC overpayment determinations over that time period. The majority of successfully challenged cases were won in discussion, favorable decisions for hospitals not appearing in federal appeals reports. Time in appeals exceeded 550 days, causing the hospitals to withdraw some cases to avoid the lengthy appeals process and/or to minimize the risk of losing the amount of the entire Part A claim. The hospitals also lost a small number of appeals by missing a filing deadline, yet there was no reciprocal case concession when the appeals system missed a deadline. RACs found no cases of care at the 3 hospitals that should not have been delivered, but rather challenged the status determination (inpatient vs outpatient) to dispute medical necessity of care delivered. Finally, an average of approximately 5 FTEs at each institution were employed in the audits and appeals process. These data support a need for systematic improvements in the RAC system so that fair, constructive, and cost‐efficient surveillance of the Medicare program can be realized.

Medicare patients are increasingly hospitalized as outpatients under observation. From 2006 to 2012, outpatient services grew nationally by 28.5%, whereas inpatient discharges decreased by 12.6% per Medicare beneficiary.[1] This increased use of observation stays for hospitalized Medicare beneficiaries and the recent Centers for Medicare & Medicaid Services (CMS) 2‐Midnight rule for determination of visit status are increasing areas of concern for hospitals, policymakers, and the public,[2] as patients hospitalized under observation are not covered by Medicare Part A hospital insurance, are subject to uncapped out‐of‐pocket charges under Medicare Part B, and may be billed by the hospital for certain medications. Additionally, Medicare beneficiaries hospitalized in outpatient status, which includes all hospitalizations under observation, do not qualify for skilled nursing facility care benefits after discharge, which requires a stay that spans at least 3 consecutive midnights as an inpatient.[3]

In contrast, the federal Recovery Audit program, previously called and still commonly referred to as the Recovery Audit Contractor (RAC) program, responsible for postpayment review of inpatient claims, has received relatively little attention. Established in 2006, and fully operationalized in federal fiscal year (FY) 2010,[4] RACs are private government contractors granted the authority to audit hospital charts for appropriate medical necessity, which can consider whether the care delivered was indicated and whether it was delivered in the appropriate Medicare visit status, outpatient or inpatient. Criteria for hospitalization status (inpatient vs outpatient) as defined in the Medicare Conditions of Participation, often allow for subjectivity (medical judgment) in determining which status is appropriate.[5] Hospitals may contest RAC decisions and payment denials through a preappeals discussion period, then through a 5‐level appeals process. Although early appeals occur between the hospital and private contractors, appeals reaching level 3 are heard by the Department of Health and Human Services (HHS) Office of Medicare Hearings and Appeals (OMHA) Administrative Law Judges (ALJ). Levels 4 (Medicare Appeals Council) and 5 (United States District Court) appeals are also handled by the federal government.[6]

Medicare fraud and abuse should not be tolerated, and systematic surveillance needs to be an integral part of the Medicare program.[4] However, there are increasing concerns that the RAC program has resulted in overaggressive denials.[7, 8] Unlike other Medicare contractors, RAC auditors are paid a contingency fee based on the percentage of hospital payment recouped for cases they audit and deny for improper payment.[4] RACs are not subject to any financial penalty for cases they deny but are overturned in the discussion period or in the appeals process. This may create an incentive system that financially encourages RACs to assert improper payment, and the current system lacks both transparency and clear performance metrics for auditors. Of particular concern are Medicare Part A complex reviews, the most fiscally impactful area of RAC activity. According to CMS FY 2013 data, 41.1% of all claims with collections were complex reviews, yet these claims accounted for almost all (95.2%) of total dollars recovered by the RACs, with almost all (96%) dollars recovered being from Part A claims.[9] Complex reviews involve an auditor retrospectively and manually reviewing a medical record and then using his or her clinical and related professional judgment to decide whether the care was medically necessary. This is compared to automated coding or billing reviews, which are based solely on claims data.

Increased RAC activity and the willingness of hospitals to challenge RAC findings of improper payment has led to an increase in appeals volume that has overloaded the appeals process. On March 13, 2013, CMS offered hospitals the ability to rebill Medicare Part B as an appeals alternative.[10] This did not temper level 3 appeals requests received by the OMHA, which increased from 1250 per week in January 2012 to over 15,000 per week by November 2013.[11] Citing an overwhelmingly increased rate of appeal submissions and the resultant backlog, the OMHA decided to freeze new hospital appeals assignments in December 2013.[11] In another attempt to clear the backlog, on August 29, 2014, CMS offered a settlement that would pay hospitals 68% of the net allowable amount of the original Part A claim (minus any beneficiary deductibles) if a hospital agreed to concede all of its eligible appeals.[12] Notably, cases settled under this agreement would remain officially categorized as denied for improper payment.

The HHS Office of Inspector General (OIG)[4] and the CMS[9, 13, 14] have produced recent reports of RAC auditing and appeals activity that contain variable numbers that conflict with hospital accounts of auditing and appeals activity.[15, 16] In addition to these conflicting reports, little is known about RAC auditing of individual programs over time, the length of time cases spend in appeals, and staff required to navigate the audit and appeals processes. Given these questions, and the importance of RAC auditing pressure in the growth of hospital observation care, we conducted a retrospective descriptive study of all RAC activity for complex Medicare Part A alleged overpayment determinations at the Johns Hopkins Hospital, the University of Utah, and University of Wisconsin Hospital and Clinics for calendar years 2010 to 2013.

METHODS

The University of Wisconsin‐Madison Health Sciences institutional review board (IRB) and the Johns Hopkins Hospital IRB did not require review of this study. The University of Utah received an exemption. All 3 hospitals are tertiary care academic medical centers. The University of Wisconsin Hospital and Clinics (UWHC) is a 592‐bed hospital located in Madison, Wisconsin,[17] the Johns Hopkins Hospital (JHH) is a 1145‐bed medical center located in Baltimore, Maryland,[18] and the University of Utah Hospital (UU) is a 770‐bed facility in Salt Lake City, Utah (information available upon request). Each hospital is under a different RAC, representing 3 of the 4 RAC regions, and each is under a different Medicare Administrative Contractor, contractors responsible for level 1 appeals. The 3 hospitals have the same Qualified Independent Contractor responsible for level 2 appeals.

For the purposes of this study, any chart or medical record requested for review by an RAC was considered a medical necessity chart request or an audit. The terms overpayment determinations and denials were used interchangeably to describe audits the RACs alleged did not meet medical necessity for Medicare Part A billing. As previously described, the term medical necessity specifically considered not only whether actual medical services were appropriate, but also whether the services were delivered in the appropriate status, outpatient or inpatient. Appeals and/or request for discussion were cases where the overpayment determination was disputed and challenged by the hospital.

All complex review Medicare Part A RAC medical record requests by date of RAC request from the official start of the RAC program, January 1, 2010,[4] to December 31, 2013, were included in this study. Medical record requests for automated reviews that related to coding and billing clarifications were not included in this study, nor were complex Medicare Part B reviews, complex reviews for inpatient rehabilitation facilities, or psychiatric day hospitalizations. Notably, JHH is a Periodic Interim Payment (PIP) Medicare hospital, which is a reimbursement mechanism where biweekly payments [are] made to a Provider enrolled in the PIP program, and are based on the hospital's estimate of applicable Medicare reimbursement for the current cost report period.[19] Because PIP payments are made collectively to the hospital based on historical data, adjustments for individual inpatients could not be easily adjudicated and processed. Due to the increased complexity of this reimbursement mechanism, RAC audits did not begin at JHH until 2012. In addition, in contrast to the other 2 institutions, all of the RAC complex review audits at JHH in 2013 were for Part B cases, such as disputing need for intensity‐modulated radiation therapy versus conventional radiation therapy, or contesting the medical necessity of blepharoplasty. As a result, JHH had complex Part A review audits only for 2012 during the study time period. All data were deidentified prior to review by investigators.

As RACs can audit charts for up to 3 years after the bill is submitted,[13] a chart request in 2013 may represent a 2010 hospitalization, but for purposes of this study, was logged as a 2013 case. There currently is no standard methodology to calculate time spent in appeals. The UWHC and JHH calculate time in discussion or appeals from the day the discussion or appeal was initiated by the hospital, and the UU calculates the time in appeals from the date of the findings letter from the RAC, which makes comparable recorded time in appeals longer at UU (estimated 510 days for 20112013 cases, up to 120 days for 2010 cases).Time in appeals includes all cases that remain in the discussion or appeals process as of June 30, 2014.

The RAC process is as follows (Tables 1 and 2):

1. The RAC requests hospital claims (RAC Medical Necessity Chart Requests [Audits]).
2. The RAC either concludes the hospital claim was compliant as filed/paid and the process ends or the RAC asserts improper payment and requests repayment (RAC Overpayment Determinations of Requested Charts [Denials]).
3. The hospital makes an initial decision to not contest the RAC decision (and repay), or to dispute the decision (Hospital Disputes Overpayment Determination [Appeal/Discussion]). Prior to filing an appeal, the hospital may request a discussion of the case with an RAC medical director, during which the RAC medical director can overturn the original determination. If the RAC declines to overturn the decision in discussion, the hospital may proceed with a formal appeal. Although CMS does not calculate the discussion period as part of the appeals process,[12] overpayment determinations contested by the hospital in either discussion or appeal represent the sum total of RAC denials disputed by the hospital.

4. Contested cases have 1 of 4 outcomes:

   • Contested overpayment determinations can be decided in favor of the hospital (Discussion or Appeal Decided in Favor of Hospital or RAC Withdrew)

   • Contested overpayment determinations can be decided in favor of the RAC during the appeal process, and either the hospital exhausts the appeal process or elects not to take the appeal to the next level. Although the appeals process has 5 levels, no cases at our 3 hospitals have reached level 4 or 5, so cases without a decision to date remain in appeals at 1 of the first 3 levels (Case Still in Discussion or Appeals).[4]
   • Hospital may miss an appeal deadline (Hospital Missed Appeal Deadline at Any Level) and the case is automatically decided in favor of the RAC.
   • As of March 13, 2013,[10] for appeals that meet certain criteria and involve dispute over the billing of hospital services under Part A, CMS allowed hospitals to withdraw an appeal and rebill Medicare Part B. Prior to this time, hospitals could rebill for a very limited list of ancillary Part B Only services, and only within the 1‐year timely filing period.[13] Due to the lengthy appeals process and associated legal and administrative costs, hospitals may not agree with the RAC determination but make a business decision to recoup some payment under this mechanism (Hospital Chose to Rebill as Part B During Discussion or Appeals Process).

The administration at each hospital provided labor estimates for workforce dedicated to the review process generated by the RACs based on hourly accounting of one‐quarter of work during 2012, updated to FY 2014 accounting (Table 3). Concurrent case management status determination work was not included in these numbers due to the difficulty in solely attributing concurrent review workforce numbers to the RACs, as concurrent case management is a CMS Condition of Participation irrespective of the RAC program.

RESULTS

CONCLUSIONS

In this study of 3 academic medical centers, there was a more than 2‐fold increase in RAC audits and a nearly 3‐fold rise in overpayment determinations over the last 2 calendar years of the study, resulting in a more than 3‐fold increase in appeals or requests for discussion in 2012 to 2013 compared to 2010 to 2011. In addition, although CMS manually reviews less than 0.3% of submitted claims each year through programs such as the Recovery Audit Program,[9] at the study hospitals, complex Part A RAC audits occurred at a rate more than 25 times that (8.0%), suggesting that these types of claims are a disproportionate focus of auditing activity. The high overall complex Part A audit rate, accompanied by acceleration of RAC activity and the hospitals' increased willingness to dispute RAC overpayment determinations each year, if representative of similar institutions, would explain the appeals backlog, most notably at the ALJ (level 3) level. Importantly, none of these Part A complex review denials contested a need for the medical care delivered, demonstrating that much of the RAC process at the hospitals focused exclusively on the nuances of medical necessity and variation in interpretation of CMS guidelines that related to whether hospital care should be provided under inpatient or outpatient status.

These data also show continued aggressive RAC audit activity despite an increasing overturn rate in favor of the hospitals in discussion or on appeal each year (from 36.0% in 2010 to 68.0% in 2013). The majority of the hospitals' successful decisions occurred in the discussion period, when the hospital had the opportunity to review the denial with the RAC medical director, a physician, prior to beginning the official appeals process. The 33% overturn rate found in the discussion period represents an error rate by the initial RAC auditors that was internally verified by the RAC medical director. The RAC internal error rate was replicated at 3 different RACs, highlighting internal process problems across the RAC system. This is concerning, because the discussion period is not considered part of the formal appeals process, so these cases are not appearing in CMS or OIG reports of RAC activity, leading to an underestimation of the true successful overturned denial rates at the 3 study hospitals, and likely many other hospitals.

The study hospitals are also being denied timely due process and payments for services delivered. The hospitals currently face an appeals process that, on average, far exceeds 500 days. In almost half of the contested overpayment determinations, the hospitals withdrew a case or rebilled Part B, not due to agreement with a RAC determination, but to avoid the lengthy, cumbersome, and expensive appeals process and/or to minimize the risk of losing the amount of the entire Part A claim. This is concerning, as cases withdrawn in the appeals process are considered improper payments in federal reports, despite a large number of these cases being withdrawn simply to avoid an inefficient appeals process. Notably, Medicare is not adhering to its own rules, which require appeals to be heard in a timely manner, specifically 60 days for level 1 or 2 appeals, and 90 days for a level 3 appeal,[6, 20] even though the hospitals lost the ability to appeal cases when they missed a deadline. Even if hospitals agreed to the recent 68% settlement offer[12] from CMS, appeals may reaccumulate without auditing reform. As noted earlier, this recent settlement offer came more than a year after the enhanced ability to rebill denied Part A claims for Part B, yet the backlog remains.

This study also showed that a large hospital workforce is required to manage the lengthy audit and appeals process generated by RACs. These staff are paid with funds that could be used to provide direct patient care or internal process improvement. The federal government also directly pays for unchecked RAC activity through the complex appeals process. Any report of dollars that RACs recoup for the federal government should be considered in light of their administrative costs to hospitals and government contractors, and direct costs at the federal level.

This study also showed that RACs audited the 3 institutions differently, despite similar willingness of the hospitals to dispute overpayment determinations and similar hospital success rates in appeals or discussion, suggesting that hospital compliance with Medicare policy was not the driver of variable RAC activity. This variation may be due to factors not apparent in this study, such as variable RAC interpretation of federal policy, a decision of a particular RAC to focus on complex Medicare Part B or automated reviews instead of complex Part A reviews, or RAC workforce differences that are not specific to the hospitals. Regardless, the variation in audit activity suggests that greater transparency and accountability in RAC activity is merited.

Perhaps most importantly, this study highlights factors that may help explain differing auditing and appeals numbers reported by the OIG,[4] CMS,[9, 13, 14] and hospitals.[15, 16] Given the marked increase in RAC activity over the last 4 years, the 2010 and 2011 data included in a recent OIG report[4] likely do not represent current auditing and appeals practice. With regard to the CMS reports,[9, 13, 14] although CMS included FY 2013[9] activity in its most recent report, it did not account for denials overturned in the discussion period, as these are not technically appeals, even though these are contested cases decided in favor of the hospital. This most recent CMS report[9] uses overpayment determinations from FY 2013, yet counts appeals and decisions that occurred in 2013, with the comment that these decisions may be for overpayment determinations prior to 2013. The CMS reports also variably combine automated, semiautomated, complex Part A, and complex Part B claims in its reports, making interpretation challenging. Finally, although CMS reported an increase in improper payments recovered from FY 2011[14] ($939 million) to FY 2012[13] ($2.4 billion) to FY 2013[9] ($3.75 billion), this is at least partly a reflection of increased RAC activity as demonstrated in this study, and may reflect the fact that many hospitals do not have the resources to continually appeal or choose not to contest these cases based on a financial business decision. Importantly, these numbers now far exceed recoupment in other quality programs, such as the Readmissions Reduction Program (estimated $428 million next FY),[21] indicating the increased fiscal impact of the RAC program on hospital reimbursement.

To increase accuracy, future federal reports of auditing and appeals should detail and include cases overturned in the discussion period, and carefully describe the denominator of total audits and appeals given the likelihood that many appeals in a given year will not have a decision in that year. Percent of total Medicare claims subject to complex Part A audit should be stated. Reports should also identify and consider an alternative classification for complex Part A cases the hospital elects to rebill under Medicare Part B, and also detail on what grounds medical necessity is being contested (eg, whether the actual care delivered was not necessary or if it is an outpatient versus inpatient billing issue). Time spent in the appeals process must also be reported. Complex Part A, complex Part B, semiautomated, and automated reviews should also be considered separately, and dates of reported audits and appeals must be as current as possible in this rapidly changing environment.

In this study, RACs conducted complex Part A audits at a rate 25 times the CMS‐reported overall audit rate, confirming complex Part A audits are a particular focus of RAC activity. There was a more than doubling of RAC audits at the study hospitals from the years 2010 ‐ 2011 to 2012 ‐ 2013 and a nearly 3‐fold increase in overpayment determinations. Concomitantly, the more than 3‐fold increase in appeals and discussion volume over this same time period was consistent with the development of the current national appeals backlog. The 3 study hospitals won a greater percentage of contested cases each year, from approximately one‐third of cases in 2010 to two‐thirds of cases with decisions in 2013, but there was no appreciable decrease in RAC overpayment determinations over that time period. The majority of successfully challenged cases were won in discussion, favorable decisions for hospitals not appearing in federal appeals reports. Time in appeals exceeded 550 days, causing the hospitals to withdraw some cases to avoid the lengthy appeals process and/or to minimize the risk of losing the amount of the entire Part A claim. The hospitals also lost a small number of appeals by missing a filing deadline, yet there was no reciprocal case concession when the appeals system missed a deadline. RACs found no cases of care at the 3 hospitals that should not have been delivered, but rather challenged the status determination (inpatient vs outpatient) to dispute medical necessity of care delivered. Finally, an average of approximately 5 FTEs at each institution were employed in the audits and appeals process. These data support a need for systematic improvements in the RAC system so that fair, constructive, and cost‐efficient surveillance of the Medicare program can be realized.

Observation hospitalization is a growing phenomenon in the United States healthcare system.[1] For Medicare beneficiaries, observation encounters increased 33.6% from 2004 to 2011, with inpatient encounters decreasing by 7.8% over the same period.[2]

Observation length of stay has also increased. Medicare states that observation care should typically last <24 hours, and in only rare and exceptional cases exceed 48 hours. We and others have showed that observation stays, on average, do not meet this definition.[1, 3] At our institution, historically less than half of observation encounters discharge in under 24 hours, and 1 in 6 stay longer than 48 hours.[3]

The Centers for Medicare and Medicaid Services (CMS) issued a rules change effective October 1, 2013, in response to concern about recent increases in the length of time that CMS beneficiaries spend as hospital outpatients receiving observation services.[4] These rules shifted observation determination from clinical criteria, such as InterQual,[5] to a time‐based rule that hinges on a 2‐midnight cut point. Patients staying <2 midnights, with few exceptions, are now observation, and those staying 2 midnights are inpatients. This is important, as patients hospitalized as observation are technically outpatients, not covered by Medicare Part A hospital insurance, and ineligible for skilled nursing facility benefits.[3, 6]

Although challenges with observation status in general are well described,[1, 3, 7] the potential impact of the 2‐midnight rule is not fully known. The purpose of our descriptive study was to examine how the new rules, retrospectively applied to recent encounters, would affect our hospital encounters, with a separate analysis of Medicare encounters and adult general medicine encounters. First, as CMS predicted a net shift from outpatient to inpatient stays[8] under the new rule, we attempted to determine whether this rule would actually reduce observation encounter frequency. Second, as CMS has cited persistently large improper payment rates in short‐stay hospital inpatient claims[4] and intends to audit <2‐midnight inpatient encounters under the assumption that many are misclassified observation stays,[4, 8, 9] we sought to determine if short‐stay inpatient and observation encounters were truly the same. Third, as insurance coverage will change based on the 2‐midnight cut point, we sought to determine whether 2 midnights separated distinct clinical populations within observation status, making the rule logical and fair. Finally, we sought to determine whether external factors, such as time of admission, day of week of admission, and transfer to our institution would impact how patients may be classified under the new rule.

METHODS

RESULTS

Percentage of Observation Encounters Reaching 2 Midnights Based on Time of Hospitalization

Observation encounters starting before 8:00 _am spanned 2 midnights 13.6% of the time, and those encounters starting after 4:00 _pm crossed 2 midnights 31.2% of the time. Two of the 3 top ICD‐9 codes were the same across LOS, with similar findings for the adult general medicine‐only group (Figure 1).

Figure 1

DISCUSSION

Although CMS predicts that more patients will be classified as inpatients under the new rule, we determined the opposite, consistent with a recent report generated by the Office of the Inspector General (OIG) for 2012 Medicare beneficiaries.[8] Our results did not change when we excluded all surgical encounters to account for possible exclusions based on the surgical inpatient‐only list. Although a small percentage of Medicare adult general medicine patients may be reclassified as inpatients under the new rules, the net effect would be that many more hospital encounters will be billed under observation rather than inpatient status. These findings assume overall length of stay will remain unchanged under these rules, an assumption that may not hold true given the financial losses we predicted hospitals may face under this rule,[12] and potential pressures on individual physicians providing patient care.

Medicare has prioritized auditing <2‐midnight inpatient encounters under the assumption that many short inpatient encounters are actually misclassified observation encounters,[4, 8, 9] prompting us to investigate whether this was the case in our patient population. Although it did not use ICD‐9 diagnosis codes, the OIG report suggested that short‐stay inpatients and observation patients may be clinically similar.[8, 13] Using ICD‐9 codes, we found no overlap between the top ICD‐9 codes for adult general medicine <2‐midnight inpatient and observation encounters, and only 1 of 5 shared codes for these encounters across all service lines. These findings are counter to the OIG report, and suggest that <2‐midnight inpatients are different from observation patients at our institution, and that <2‐midnight inpatients should not be arbitrarily reclassified as observation based solely upon LOS.

We also found that the majority of top ICD‐9 codes within observation were the same regardless of LOS, suggesting that LOS does not reliably differentiate clinically different observation populations that merit different insurance coverage (Medicare Part A for 2‐midnight encounters, Medicare Part B for <2‐midnight encounters). This lack of a clear cut point may drive an overall increase in LOS to achieve 2 midnights, as common diagnosis codes can be justified for both <2‐midnight or 2‐midnight observation stays.

Finally, we found that external factors, such as the time of day and specific day (weekday vs weekend) of hospitalization, impact the likelihood of achieving a 2‐midnight stay. Patients hospitalized earlier in the day were less likely to span 2 midnights compared to later‐day encounters, suggesting that use of a full working day as the day of presentation is harmful to a patient's chance of gaining inpatient status. Observation hospitalizations starting on a weekend day were more likely to achieve 2 midnights, which likely reflects different resource allocation and hospital efficiency on weekends, yet it is unlikely that weekend midnights, if associated with any delay in care, will be counted toward a patient's cumulative 2‐midnight total. The CMS has further indicated that midnights accrued prior to transfer from 1 hospital to another will not count toward a cumulative 2‐midnight stay. Although it would seem likely that patients requiring transfer to a tertiary care center would meet inpatient criteria, 9% of our observation encounters were transferred from other acute care hospitals, and many will have lost attributable midnights accrued prior to transfer to our hospital. Taken together, our findings strongly suggest that issues entirely unrelated to diagnosis or clinical status will impact whether hospitalized patients will be classified as inpatient or observation under the new rule.

This study has several limitations. Our data were limited to a single Midwestern tertiary care academic medical center, and may not be applicable to other healthcare settings. Second, 1.5% (466) of our inpatient stays and 56 (1.2%) of our observation encounters lacked a referral source in our administrative database, although these deficiencies would not likely change the conclusions. Finally, the total number of observation encounters starting before 8:00 _am and staying 2 midnights was small and therefore potentially subject to confounding. However, despite the fact that encounters beginning in the early morning hours may be different in ways unable to be measured in this study, encounter ICD‐9 codes were similar regardless of time of day.

Despite these limitations, our study raises concerns about the impact of CMS's new time‐driven observation rules on hospital practice patterns. We found distinctly different <2‐midnight inpatient ICD‐9 codes as compared to those for observation encounters. Reclassifying <2‐midnight inpatients as observation may inappropriately shift the financial burden of acute hospitalizations to patients who were previously eligible to receive Medicare inpatient benefits. We also demonstrated a decrease in billable inpatient encounters under the new rules, which may be countered by changes in hospital and provider practice to drive more admissions over the 2‐midnight threshold to avoid financial losses. These changes should be defensible under audit given the ambiguities of the rule we found in this study surrounding time of day of admission, weekend and transfer hospitalizations, and the fact that common observation ICD‐9 codes are similar across LOS. Ironically, the unintended consequence of the new rule may be to drive up hospital LOS, reduce efficiency, and increase the overall cost of care.

Our findings suggest that CMS should define observation care per its original intent: as a means to determine if a patient can safely return home after a short period of additional care.[6] Patients whose conditions necessitate an intensity and level of service beyond this narrow scope should be classified as full inpatients irrespective of LOS, whether that LOS is <2 midnights or 2 midnights. Policies that fail to reflect the original intent of observation status are unlikely to achieve the intended outcome of defining 2 distinct patient populations that merit different services and reimbursement.

Observation hospitalization is a growing phenomenon in the United States healthcare system.[1] For Medicare beneficiaries, observation encounters increased 33.6% from 2004 to 2011, with inpatient encounters decreasing by 7.8% over the same period.[2]

Observation length of stay has also increased. Medicare states that observation care should typically last <24 hours, and in only rare and exceptional cases exceed 48 hours. We and others have showed that observation stays, on average, do not meet this definition.[1, 3] At our institution, historically less than half of observation encounters discharge in under 24 hours, and 1 in 6 stay longer than 48 hours.[3]

The Centers for Medicare and Medicaid Services (CMS) issued a rules change effective October 1, 2013, in response to concern about recent increases in the length of time that CMS beneficiaries spend as hospital outpatients receiving observation services.[4] These rules shifted observation determination from clinical criteria, such as InterQual,[5] to a time‐based rule that hinges on a 2‐midnight cut point. Patients staying <2 midnights, with few exceptions, are now observation, and those staying 2 midnights are inpatients. This is important, as patients hospitalized as observation are technically outpatients, not covered by Medicare Part A hospital insurance, and ineligible for skilled nursing facility benefits.[3, 6]

Although challenges with observation status in general are well described,[1, 3, 7] the potential impact of the 2‐midnight rule is not fully known. The purpose of our descriptive study was to examine how the new rules, retrospectively applied to recent encounters, would affect our hospital encounters, with a separate analysis of Medicare encounters and adult general medicine encounters. First, as CMS predicted a net shift from outpatient to inpatient stays[8] under the new rule, we attempted to determine whether this rule would actually reduce observation encounter frequency. Second, as CMS has cited persistently large improper payment rates in short‐stay hospital inpatient claims[4] and intends to audit <2‐midnight inpatient encounters under the assumption that many are misclassified observation stays,[4, 8, 9] we sought to determine if short‐stay inpatient and observation encounters were truly the same. Third, as insurance coverage will change based on the 2‐midnight cut point, we sought to determine whether 2 midnights separated distinct clinical populations within observation status, making the rule logical and fair. Finally, we sought to determine whether external factors, such as time of admission, day of week of admission, and transfer to our institution would impact how patients may be classified under the new rule.

METHODS

RESULTS

Percentage of Observation Encounters Reaching 2 Midnights Based on Time of Hospitalization

Observation encounters starting before 8:00 _am spanned 2 midnights 13.6% of the time, and those encounters starting after 4:00 _pm crossed 2 midnights 31.2% of the time. Two of the 3 top ICD‐9 codes were the same across LOS, with similar findings for the adult general medicine‐only group (Figure 1).

Figure 1

DISCUSSION

Although CMS predicts that more patients will be classified as inpatients under the new rule, we determined the opposite, consistent with a recent report generated by the Office of the Inspector General (OIG) for 2012 Medicare beneficiaries.[8] Our results did not change when we excluded all surgical encounters to account for possible exclusions based on the surgical inpatient‐only list. Although a small percentage of Medicare adult general medicine patients may be reclassified as inpatients under the new rules, the net effect would be that many more hospital encounters will be billed under observation rather than inpatient status. These findings assume overall length of stay will remain unchanged under these rules, an assumption that may not hold true given the financial losses we predicted hospitals may face under this rule,[12] and potential pressures on individual physicians providing patient care.

Medicare has prioritized auditing <2‐midnight inpatient encounters under the assumption that many short inpatient encounters are actually misclassified observation encounters,[4, 8, 9] prompting us to investigate whether this was the case in our patient population. Although it did not use ICD‐9 diagnosis codes, the OIG report suggested that short‐stay inpatients and observation patients may be clinically similar.[8, 13] Using ICD‐9 codes, we found no overlap between the top ICD‐9 codes for adult general medicine <2‐midnight inpatient and observation encounters, and only 1 of 5 shared codes for these encounters across all service lines. These findings are counter to the OIG report, and suggest that <2‐midnight inpatients are different from observation patients at our institution, and that <2‐midnight inpatients should not be arbitrarily reclassified as observation based solely upon LOS.

We also found that the majority of top ICD‐9 codes within observation were the same regardless of LOS, suggesting that LOS does not reliably differentiate clinically different observation populations that merit different insurance coverage (Medicare Part A for 2‐midnight encounters, Medicare Part B for <2‐midnight encounters). This lack of a clear cut point may drive an overall increase in LOS to achieve 2 midnights, as common diagnosis codes can be justified for both <2‐midnight or 2‐midnight observation stays.

Finally, we found that external factors, such as the time of day and specific day (weekday vs weekend) of hospitalization, impact the likelihood of achieving a 2‐midnight stay. Patients hospitalized earlier in the day were less likely to span 2 midnights compared to later‐day encounters, suggesting that use of a full working day as the day of presentation is harmful to a patient's chance of gaining inpatient status. Observation hospitalizations starting on a weekend day were more likely to achieve 2 midnights, which likely reflects different resource allocation and hospital efficiency on weekends, yet it is unlikely that weekend midnights, if associated with any delay in care, will be counted toward a patient's cumulative 2‐midnight total. The CMS has further indicated that midnights accrued prior to transfer from 1 hospital to another will not count toward a cumulative 2‐midnight stay. Although it would seem likely that patients requiring transfer to a tertiary care center would meet inpatient criteria, 9% of our observation encounters were transferred from other acute care hospitals, and many will have lost attributable midnights accrued prior to transfer to our hospital. Taken together, our findings strongly suggest that issues entirely unrelated to diagnosis or clinical status will impact whether hospitalized patients will be classified as inpatient or observation under the new rule.

This study has several limitations. Our data were limited to a single Midwestern tertiary care academic medical center, and may not be applicable to other healthcare settings. Second, 1.5% (466) of our inpatient stays and 56 (1.2%) of our observation encounters lacked a referral source in our administrative database, although these deficiencies would not likely change the conclusions. Finally, the total number of observation encounters starting before 8:00 _am and staying 2 midnights was small and therefore potentially subject to confounding. However, despite the fact that encounters beginning in the early morning hours may be different in ways unable to be measured in this study, encounter ICD‐9 codes were similar regardless of time of day.

Despite these limitations, our study raises concerns about the impact of CMS's new time‐driven observation rules on hospital practice patterns. We found distinctly different <2‐midnight inpatient ICD‐9 codes as compared to those for observation encounters. Reclassifying <2‐midnight inpatients as observation may inappropriately shift the financial burden of acute hospitalizations to patients who were previously eligible to receive Medicare inpatient benefits. We also demonstrated a decrease in billable inpatient encounters under the new rules, which may be countered by changes in hospital and provider practice to drive more admissions over the 2‐midnight threshold to avoid financial losses. These changes should be defensible under audit given the ambiguities of the rule we found in this study surrounding time of day of admission, weekend and transfer hospitalizations, and the fact that common observation ICD‐9 codes are similar across LOS. Ironically, the unintended consequence of the new rule may be to drive up hospital LOS, reduce efficiency, and increase the overall cost of care.

Our findings suggest that CMS should define observation care per its original intent: as a means to determine if a patient can safely return home after a short period of additional care.[6] Patients whose conditions necessitate an intensity and level of service beyond this narrow scope should be classified as full inpatients irrespective of LOS, whether that LOS is <2 midnights or 2 midnights. Policies that fail to reflect the original intent of observation status are unlikely to achieve the intended outcome of defining 2 distinct patient populations that merit different services and reimbursement.

Observation hospitalization is a growing phenomenon in the United States healthcare system.[1] For Medicare beneficiaries, observation encounters increased 33.6% from 2004 to 2011, with inpatient encounters decreasing by 7.8% over the same period.[2]

Observation length of stay has also increased. Medicare states that observation care should typically last <24 hours, and in only rare and exceptional cases exceed 48 hours. We and others have showed that observation stays, on average, do not meet this definition.[1, 3] At our institution, historically less than half of observation encounters discharge in under 24 hours, and 1 in 6 stay longer than 48 hours.[3]

The Centers for Medicare and Medicaid Services (CMS) issued a rules change effective October 1, 2013, in response to concern about recent increases in the length of time that CMS beneficiaries spend as hospital outpatients receiving observation services.[4] These rules shifted observation determination from clinical criteria, such as InterQual,[5] to a time‐based rule that hinges on a 2‐midnight cut point. Patients staying <2 midnights, with few exceptions, are now observation, and those staying 2 midnights are inpatients. This is important, as patients hospitalized as observation are technically outpatients, not covered by Medicare Part A hospital insurance, and ineligible for skilled nursing facility benefits.[3, 6]

Although challenges with observation status in general are well described,[1, 3, 7] the potential impact of the 2‐midnight rule is not fully known. The purpose of our descriptive study was to examine how the new rules, retrospectively applied to recent encounters, would affect our hospital encounters, with a separate analysis of Medicare encounters and adult general medicine encounters. First, as CMS predicted a net shift from outpatient to inpatient stays[8] under the new rule, we attempted to determine whether this rule would actually reduce observation encounter frequency. Second, as CMS has cited persistently large improper payment rates in short‐stay hospital inpatient claims[4] and intends to audit <2‐midnight inpatient encounters under the assumption that many are misclassified observation stays,[4, 8, 9] we sought to determine if short‐stay inpatient and observation encounters were truly the same. Third, as insurance coverage will change based on the 2‐midnight cut point, we sought to determine whether 2 midnights separated distinct clinical populations within observation status, making the rule logical and fair. Finally, we sought to determine whether external factors, such as time of admission, day of week of admission, and transfer to our institution would impact how patients may be classified under the new rule.

METHODS

RESULTS

Percentage of Observation Encounters Reaching 2 Midnights Based on Time of Hospitalization

Observation encounters starting before 8:00 _am spanned 2 midnights 13.6% of the time, and those encounters starting after 4:00 _pm crossed 2 midnights 31.2% of the time. Two of the 3 top ICD‐9 codes were the same across LOS, with similar findings for the adult general medicine‐only group (Figure 1).

Figure 1

DISCUSSION

Although CMS predicts that more patients will be classified as inpatients under the new rule, we determined the opposite, consistent with a recent report generated by the Office of the Inspector General (OIG) for 2012 Medicare beneficiaries.[8] Our results did not change when we excluded all surgical encounters to account for possible exclusions based on the surgical inpatient‐only list. Although a small percentage of Medicare adult general medicine patients may be reclassified as inpatients under the new rules, the net effect would be that many more hospital encounters will be billed under observation rather than inpatient status. These findings assume overall length of stay will remain unchanged under these rules, an assumption that may not hold true given the financial losses we predicted hospitals may face under this rule,[12] and potential pressures on individual physicians providing patient care.

Medicare has prioritized auditing <2‐midnight inpatient encounters under the assumption that many short inpatient encounters are actually misclassified observation encounters,[4, 8, 9] prompting us to investigate whether this was the case in our patient population. Although it did not use ICD‐9 diagnosis codes, the OIG report suggested that short‐stay inpatients and observation patients may be clinically similar.[8, 13] Using ICD‐9 codes, we found no overlap between the top ICD‐9 codes for adult general medicine <2‐midnight inpatient and observation encounters, and only 1 of 5 shared codes for these encounters across all service lines. These findings are counter to the OIG report, and suggest that <2‐midnight inpatients are different from observation patients at our institution, and that <2‐midnight inpatients should not be arbitrarily reclassified as observation based solely upon LOS.

We also found that the majority of top ICD‐9 codes within observation were the same regardless of LOS, suggesting that LOS does not reliably differentiate clinically different observation populations that merit different insurance coverage (Medicare Part A for 2‐midnight encounters, Medicare Part B for <2‐midnight encounters). This lack of a clear cut point may drive an overall increase in LOS to achieve 2 midnights, as common diagnosis codes can be justified for both <2‐midnight or 2‐midnight observation stays.

Finally, we found that external factors, such as the time of day and specific day (weekday vs weekend) of hospitalization, impact the likelihood of achieving a 2‐midnight stay. Patients hospitalized earlier in the day were less likely to span 2 midnights compared to later‐day encounters, suggesting that use of a full working day as the day of presentation is harmful to a patient's chance of gaining inpatient status. Observation hospitalizations starting on a weekend day were more likely to achieve 2 midnights, which likely reflects different resource allocation and hospital efficiency on weekends, yet it is unlikely that weekend midnights, if associated with any delay in care, will be counted toward a patient's cumulative 2‐midnight total. The CMS has further indicated that midnights accrued prior to transfer from 1 hospital to another will not count toward a cumulative 2‐midnight stay. Although it would seem likely that patients requiring transfer to a tertiary care center would meet inpatient criteria, 9% of our observation encounters were transferred from other acute care hospitals, and many will have lost attributable midnights accrued prior to transfer to our hospital. Taken together, our findings strongly suggest that issues entirely unrelated to diagnosis or clinical status will impact whether hospitalized patients will be classified as inpatient or observation under the new rule.

This study has several limitations. Our data were limited to a single Midwestern tertiary care academic medical center, and may not be applicable to other healthcare settings. Second, 1.5% (466) of our inpatient stays and 56 (1.2%) of our observation encounters lacked a referral source in our administrative database, although these deficiencies would not likely change the conclusions. Finally, the total number of observation encounters starting before 8:00 _am and staying 2 midnights was small and therefore potentially subject to confounding. However, despite the fact that encounters beginning in the early morning hours may be different in ways unable to be measured in this study, encounter ICD‐9 codes were similar regardless of time of day.

Despite these limitations, our study raises concerns about the impact of CMS's new time‐driven observation rules on hospital practice patterns. We found distinctly different <2‐midnight inpatient ICD‐9 codes as compared to those for observation encounters. Reclassifying <2‐midnight inpatients as observation may inappropriately shift the financial burden of acute hospitalizations to patients who were previously eligible to receive Medicare inpatient benefits. We also demonstrated a decrease in billable inpatient encounters under the new rules, which may be countered by changes in hospital and provider practice to drive more admissions over the 2‐midnight threshold to avoid financial losses. These changes should be defensible under audit given the ambiguities of the rule we found in this study surrounding time of day of admission, weekend and transfer hospitalizations, and the fact that common observation ICD‐9 codes are similar across LOS. Ironically, the unintended consequence of the new rule may be to drive up hospital LOS, reduce efficiency, and increase the overall cost of care.

Our findings suggest that CMS should define observation care per its original intent: as a means to determine if a patient can safely return home after a short period of additional care.[6] Patients whose conditions necessitate an intensity and level of service beyond this narrow scope should be classified as full inpatients irrespective of LOS, whether that LOS is <2 midnights or 2 midnights. Policies that fail to reflect the original intent of observation status are unlikely to achieve the intended outcome of defining 2 distinct patient populations that merit different services and reimbursement.